Friday, April 9, 2010

RBC Skip a payment Mortgage Option

RBC mortgages offer a feature called "skip a payment" where you don't make a mortgage payment that month, and the interest is added to the principle. RBC allows you to do this once per anniversary year, starting from the second year of your mortgage.

This will increase your mortgage amortization, and cause you to pay more interest over the life of your mortgage. But on the other hand you will have cheap more money in your hands to invest.
One of my rental properties is financed through RBC, and I tend to call them up every year and ask them to skip a payment. It’s easy to find a place to deploy this new found capital to earn more than the prime -0.4 of tax deductable debt it is costing. So in my books skipping a mortgage payment is a win win situation.

However this year I was presented with the opportunity to reamortize this mortgage, since when I first got it prime has dropped significantly, and the mortgage amortization had dropped to about 15 years.
My goal here is to increase the cash flow, so I had to figure out what to do:

1. skip a payment this month then re-amortize the mortgage.
2. re-amortize the mortgage then skip a payment next month.

I had to sleep on this one, for the longest time I thought that both were equivalent. In both cases you’re not paying anything next month. So the amount you pay is the same. The amount you owe the bank is the same.

However now that I am older (yes) and wiser (not really) I realized that option 2, re-amortize then skip would produce better cash flow. The reason being is that the re-amortization would occur over a longer period of time. (The new amortization will include the skipped month) while in option 1 the new amortization will not include the skipped month. Therefore the monthly payments therefore the cash flow in option 2 will be slightly better.

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